Can You Identify Pyramid and Ponzi Schemes? | Attorney General - State of Colorado

Can You Identify Pyramid and Ponzi Schemes?

Pyramid Schemes - In a pyramid scheme, participants attempt to make money by recruiting new participants. These schemes typically promise significant returns in a very short period of time.  They are often disguised as multi-level marketing programs, selling legitimate products or services. But the Promoters of the investment use money from new recruits to pay off early stage investors until eventually, the pyramid collapses. At some point, the schemes get too big, the promoter cannot raise enough money from new investors to pay earlier investors, and people lose their money.

Ponzi Schemes - A Ponzi scheme is an investment fraud that pays existing investors with funds collected from new investors. Ponzi scheme Promoters often promise that invested funds will generate high returns with little or no risk. But the Promoters do not invest the money as represented; instead, they use the majority of those funds for their own personal use and to pay earlier investors.

Without any legitimate earnings, Ponzi schemes require a steady stream of new money to survive. When the promoter is unable to recruit new investors, or when large numbers of existing investors cash out, these schemes collapse.

Ponzi and pyramid schemes are closely related because they both involve paying longer-standing members with money from new participants, instead of actual profits from investing or selling products to the public.

Other types of investment fraud include prime bank investments, high yield investment programs, pre-IPO investment scams, promissory notes, and pump and dump schemes.

If you believe you have been victimized by a pyramid or Ponzi scheme or you wish to report suspicious activity, please file a report here.